Impact of Political Instability on International Investment and Trade in Pakistan

Abstract

This paper focuses on the effect of political instability on international investment and trade in Pakistan. The sample comprised of annual data for a period of 41 years (from 1976 to 2016). To test the long and short run relationships among the variables, ARDL model is applied and particularly Error Correction Model is used for short run analysis. To check the serial correlation in the ECM models, LM serial correlation test is applied. Cumulative sum (CUSUM) is also utilized to test the stability of the ARDL models. The unit root of all the variables is also tested and it is found that all the variables are stationary either at level or at first difference. Findings conclude that political instability badly hampers both the international investment and trade in the long-run. Moreover, in short-run, the political instability significantly hinders the foreign portfolio investment and exports. No significant impact of political instability is found on foreign direct investment and imports in the long run.